Malta: Country Economic Forecast: 30 Mar 2011

A solid pick-up in tourism and other service exports brought faster than expected recovery in 2010, with GDP growth put at 3.6% as the rate rose to 3.9% in Q4. But a slowdown to about 2% is forecast this year as the government reins in its deficit under EU pressure, with inflation and North African turbulence adding to tourism restraint in H1. Consumer price inflation has stayed below the EU average as producer prices levelled off after strong 2010 growth, helping to keep tourism growing even from currency areas that depreciated against the euro. Exports outgrew imports in 2010 despite energy cost rises and tourism's appetite for consumer imports, signalling some success for imports substitution and industrial diversification. Budget cuts are still needed to prevent EU action despite a reduced bailout fund contribution. The retrenchment needed to cut the fiscal deficit to 3% of GDP by 2013 will keep growth below trend in 2011-12. Air Malta restructuring entails one-off budgetary costs this year, but other airlines are set to step up flights, supporting tourism growth. The government has initially avoided involvement in US- and NATO-led military intervention in Libya, hedging its bets regarding future regimes there, but bases are being used for humanitarian supplies. These missions will bring a short-term demand boost, and political change in North Africa may raise future migration flows as well as commercial opportunities.